Tuesday, 16 September 2008

Demise of Lehman puts Strain on Market for Credit Default Swaps

The collapse of Lehman Brothers is putting significant strain on the giant, opaque, market for credit default swaps, in which investors buy protection against the risk of corporate defaults, and reinvigorating longstanding calls for improved regulation of the markets.

The cost of insuring against corporate default surged yesterday on concerns about the safety of financial companies and about the potential unravelling of the $62trn ($34.6trn) market, in which Lehman had been a major counterparty.

Dealers were working furiously to gauge the effect of the winding down of Lehman's trading positions, and many agreed between themselves to honour the results of a shadow trading session, conducted on Sunday night, aimed at cutting Lehman out of many trades.


These Credit Default Swaps are set to undermine many more large financial institutions. More bankruptcies to follow.

[Posted at the SpookyWeather blog, September 16th, 2008.]

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